U.S. Supreme Court Fails to Protect Pension Plan Participants

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The U.S. Supreme Court handed down a tremendous defeat for pension plan participants when it allowed a pension plan administrator who made what it termed an "honest mistake" to not be stripped of the deference ordinarily given administrators.

AARP's "friend of the court" brief, filed by attorneys with AARP Foundation Litigation, urged the court to uphold a lower court's own remedy in a situation in which changes to a pension plan had not been properly disclosed to participants.

Defendants urged that they should have the last word in how to remedy the wrongdoing in which they took part. Ruling that "people make mistakes," the Supreme Court agreed.
The Dispute

Plaintiffs were current or former employees of the Xerox Corporation who challenged the manner in which their pension plan was administered. Each of the plaintiffs was a participant in the Xerox Retirement Income Guarantee Plan who previously left the company and was subsequently rehired. Upon initial departure from Xerox, each of the plaintiffs received a lump-sum distribution of his/her then-accrued pension benefits. At issue in this case was the appropriate remedy to calculate the additional pension benefits due to these rehired employees upon their ultimate retirement from Xerox.

Although the Plan stated that there would be an offset for the lump sum distribution, it did not explain how the offset was to be calculated. The plan administrator argued that there should be a reduction based on the amount that the lump sum would be worth had it remained in the Xerox plan. For some employees that meant they would not receive any additional money in their pension — so they would have worked additional years for Xerox and not earned any additional pension benefits. The district court, and the Second Circuit, rejected the plan administrator's interpretation of the plan, and instead ruled that there should be a dollar for dollar reduction, a remedy the court created.

The plan administrator appealed, arguing that once a violation of law was found, the courts must give a plan administrator time to adopt a new plan interpretation.
AARP'S Brief

AARP argued that the long-term effect of an employer reneging on its benefit promise wreaks havoc on the individual since retirement occurs at an age when employees do not have time to make up their losses. By failing to disclose the method of calculating the offset to reduce employee's benefits in the plan, the bargain between employer and employee was distorted and the formula ultimately conferred a windfall on Xerox.

The brief argued that it is imperative upon a court to ensure fairness for employees and that in such a case, deference to the administrator is not required by the Employee Retirement Income Security Act (ERISA), the main federal law governing employee benefits and the law under which this dispute was brought.

Because the plan administrator had made the initial mistake that led to the problem in this dispute, the brief argued, the administrator lost the deference that the law ordinarily gave administrators in assessing their decisions.

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